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Cryptocurrencies could revolutionize money and finance. But even more than that, they symbolize how trust is changing as we increasingly rely on technology rather than traditional institutions - like banks and governments - to handle some of our most important problems. Right now, money has only been partially digitized, and it plods around the world at a snail's pace compared to how fast data moves. But all that could change with truly digital cryptocurrencies.

For a while, it seemed like the cryptocurrency bitcoin was in the news all the time. It’s (in)famous for being the currency of choice on the Silk Road, which was a dark web drug marketplace. Your impression may be that bitcoin has a bad rap all around, or that it's a techno-utopia pipe dream.

But as Mike and I found out in producing this episode, bitcoin is going in some interesting directions. Its underlying technology, the blockchain, has generated interest not just in tech circles, but also from big banks and financial institutions. Ironic, considering bitcoin was born out of a libertarian, anti-establishment cultural movement shortly after the onset of the Great Recession, when trust in Wall Street and Washington was at a low.

In this episode, we trace the journey of bitcoin. We talk to Jared Steffes, an entrepreneur who got hooked on bitcoin early on. Both Jared and New York Times reporter Nathaniel Popper help us understand the topsy-turvy journey of bitcoin, from its beginning, to its entry to Silicon Valley, through the Silk Road and subsequent congressional hearings, to the collapse of Mt. Gox in 2014, and finally, up to this year when the cryptocurrency faced American regulation for the first time in New York.

Mike and I interview Ben Lawsky, the lead regulator on the Bitlicense law, who served as New York’s first Superintendent of Financial Services. He stepped down earlier this year, and is now a Stanford Cyber Initiative Visiting Scholar. We also talk to Susan Athey, an economist and the Economics of Technology Professor at the Stanford Business School, who explains all the incredible benefits of cryptocurrencies. She says that traditional banks and financial institutions recognize the power of bitcoin’s blockchain technology, which is why they are now trying to innovate on the blockchain to improve the efficiency of their own services.

Side note: in this episode, we do a very brief explainer of what bitcoin is – mostly we whiz through the technicalities because we want to get to the good stuff about how bitcoin has catalyzed change and already made a mark on society. But, if you want a more detailed explanation, check out Planet Money’s episode on it from a few years back. It’s from 2011 (ancient in Internet-time, I know), but I found it really helpful, informative, and fun.

ALLISON BERKE: This podcast is also supported by the Stanford Cyber Initiative, which aims to produce policy-relevant research and inform debates about the safest and best ways to integrate cyber technologies into society. Learn more about the Cyber Initiative at cyber DOT Stanford DOT edu.

[THEME MUSIC: “From the Outset,” Nick Carlozzi]

LESLIE CHANG: From Stanford, this is Raw Data. I’m Leslie Chang.

MICHAEL C OSBORNE: And I’m Mike Osborne. Today’s show: New Money.

[MUSIC]

MCO: Today, information and data move around more or less instantaneously. But with money, it’s a little different. It turns out it’s actually hard to move money at the same speed as the internet.

LC: Banks, businesses, governments, and individuals – all of us are working within a sluggish system. Payments take days to be verified, there are middlemen and intermediaries for all kinds of transactions, and there are huge costs every time we wire money across international borders.

MCO: But what if we could have a safe and trusted, purely digital currency? This has been a dream since at least the 1990s, and the whole conversation changed in 2008 with the arrival of the cryptocurrency [pause] bitcoin.

LC: Bitcoin first popped onto the scene when a programmer going by the pseudonym Satoshi Nakamoto started messaging a group of libertarian-minded coders who called themselves the Cypherpunks.

MCO: Whether it was part of Satoshi Nakamoto’s plan or not, the introduction of Bitcoin was perfectly timed. It debuted shortly after the onset of the Great Recession, when trust in Wall Street and Washington was at a low.

LC: And just to pause on that for a second, trust is actually a really important part of the story. Many of us take for granted just how much trust is necessary for a functioning financial system.

MCO: Now, when most people first learn about bitcoin, they’re naturally skeptical. Is it a ponzi scheme? Is it the currency of criminals? And just how in the heck can something that only exists in cyberspace hold any value anyway?

LC: But a lot of people who study cryptocurrencies say that there’s more here than meets the eye. Bitcoin has had a stubborn persistence, and over the last year or so, governments, banks, and start-ups have been devoting resources to study and develop bitcoin’s underlying technology – the blockchain.

MCO: So what’s going on here? Why are banks and governments pursuing a technology that was originally designed to undermine their power? And how much does this stuff matter for the rest of us? To answer this, Leslie and I decided to trace the journey of bitcoin. We started by looking for someone who was involved early on.

LC: Meet Jared Steffes. He’s an entrepreneur and self-proclaimed tech enthusiast. Jared encountered Bitcoin in March 2010, a little over a year after it first debuted.

JARED STEFFES: I was at South by Southwest with some of my security and engineer friends from Google, Facebook and Open DNS. And we're sitting around, having a drink and talking about new stuff going on. They're like, "Jared have you heard of Bitcoin?" I'm like "No. What is this?" They're like, "It's a completely new currency based off of the internet." They tried to explain Blockchain to me and everything else. By the end of that evening, I had my Macbook Pro up and mining the rest of the week, while we're at South by Southwest.

LC: The whole system of bitcoin starts with this process of mining. Satoshi Nakamoto designed it so that there would be a finite supply, which means it’s kinda like mining for gold – bitcoins are scarce.

MCO: We’ve mentioned the blockchain a few times now. You can think of the blockchain as a ledger, a big spreadsheet in the sky that every computer can see. The spreadsheet keeps track of all the transactions people are making as they trade bitcoin.

LC: Transactions are bundled into blocks, and for each block to be completed, the computers in the bitcoin universe have to come to an agreement on what they’re seeing in the ledger. To do this, they have to solve cryptographic puzzles.

MCO: All the people mining race against each other to be the first to confirm each block’s transactions.

LC: And the first computer in the network to verify the transactions in any given block gets rewarded with an allotment of bitcoin. Once the block is confirmed by the other computers, the block is added to the chain and the race starts all over again.

MCO: So in 2010 Jared decided to set up his computer to mine for bitcoin. Mining has grown more competitive and expensive over time, but back then, it was an open playing field.

LC: Individuals like Jared would sometimes join groups where people would pool their computing power so that they could mine more efficiently.

JS: The way a pool works is, you create a worker at that website and that worker address goes inside of your client, your mining program. Then it hooks up to their server and makes one giant tool that's mining the coins.

LC: Your worker is your individual computer, and then a lot of different people have worker computers that are all combining their computing power?

JS: Correct, you nailed it. That's the way to do it. In Star Trek it's like the Borg. All of them are together and they are one.

LC: Jared mined seven tenths of a Bitcoin that week. At the time, each coin was only worth about seven US dollars, so he had mined the equivalent of four dollars and ninety cents.

MCO: FYI, at the time of this recording , that point-seven of a bitcoin is worth about 230 bucks.

LC: Jared didn’t really know what to do with his four dollars and ninety cents worth of bitcoin, so he stored it on a dummy email address.

JS: I set up a new email address, all this stuff because I was afraid the government was going to come after me. It was just such wild stuff that didn’t make any sense. Now who knows where that seven-tenths of a coin is. It's in some email address that I forgot about.

LC: Oh, so you lost it.

JS: Yeah unfortunately.

It seemed so anti-American at the time. You know, it’s just like, oh man, another currency being used here and I can just give this to somebody else for something.

MCO: As people like Jared began to experiment, they grew more impressed with the system. People gravitated towards bitcoin for different reasons, but it especially appealed to those with an anti-establishment attitude and a mistrust of government.

JS: Yeah I was definitely on the libertarian side of it. Just understanding how much the US government can track a bill is really interesting, and here's something digital that offers all this anonymity. It's like this pirate world.

[MUSIC: “Dirt Rhodes,” Kevin MacLeod”]

MCO: Satoshi Nakamoto engineered some clever incentives into the bitcoin system. For starters, it’s decentralized, so there’s no one single person or one single computer in charge.

LC: Everyone has to work together for the whole system to function. And there’s no way to counterfeit bitcoin.

MCO: Thus far at least, no one has been able to hack the blockchain. People have hacked into businesses and exchanges that use bitcoin, but a lot of computer science experts say the blockchain itself cannot be hacked.

LC: For all these reasons, bitcoin has captured the attention of prominent economists like Susan Athey. She’s the Economics of Technology Professor at the Stanford Business School.

SUSAN ATHEY: One way that I put it is that the Bitcoin system is a big spreadsheet that keeps track of who has what. The key thing is that who has what, the what is a purely digital asset, and the technology makes that secure., and it moves via a protocol, which means you don't need middle-men. That allows, yeah, this trustless, peer-to-peer movement of assets around the world instantly.

MCO: And, with Bitcoin specifically, the “trades” or transactions don’t require the involvement of a bank, government, clearinghouse, brokerage firm, or any other third party. All exchanges are direct – peer to peer.

LC: This is why cryptocurrencies are potentially transformative: they can totally redistribute trust and power. You don’t have to rely on anyone to oversee your money. You just have to trust the computers distributed around the world, tracking the blockchain.

MCO: Athey says that this is a game-changer for people living with volatile currencies.

SA: We're kind of used to, in the developed world, that the things we use as currency have predictable exchange rates, and clearly, a fluctuating exchange rate is a huge disadvantage for an asset if you want to hold it and plan on paying your bills with it next week. As an economist, I certainly see those costs as being really huge.

MCO: Now, Bitcoin itself has had some extreme ups and downs, but, bitcoin supporters say that it’s a question of relative volatility. Yes, Bitcoin fluctuates wildly when compared with the US dollar, but its fluctuations may be much less erratic than other currencies.

LC: Athey says that digital currencies can also help people in developing countries who right now have a difficult time saving money and building capital.

SA: One of the transformative aspects of digital currency is it allows anybody in the world to have access to international financial markets.

I don't think we're ever going back. I think 10-15 year from now, it would be very difficult for any country in the world to maintain effective capital controls. Today, the rich in developing countries are able to protect their wealth through buying land, buying cars, buying apartments in London, and so on, but the poor have much worse options. That's going to change.

MCO: She also points out that our current financial system is full of antiquated practices.

SA: When you look at our existing financial system, the formal financial system, it's built up by sort of digitizing analog processes.

The way that we move money around the world is through this correspondent banking system where maybe one bank will send money to another bank overnight within a country. Then there's a correspondent bank who's in the business of having bank accounts in lots of other banks around the world, and they're going to move money through this network of correspondent banks. Then when you arrive in the right country, you'll go to another bank overnight.

LC: Basically, the system is pretty klugey – there are tons of steps, and it can take days before transactions are settled and the money gets to its intended destination. Things hang in limbo, which seems kinda crazy when you think about how fast we’re able to communicate these days.

MCO: So, yeah, there's a lot to like about cryptocurrencies in theory, but it's not as easy as just making up a currency. For this to work, you need a bunch of people to BELIEVE it has value. And then you need people to actually start buying and selling stuff with it.

LC: This is actually part of a larger debate about the whole nature of money. Some people believe that currency needs to be backed by a scarce resource like gold.

MCO: Others say none of that matters, and that it’s all about trust and perception. Money is just a social technology, and the only thing that’s required for that twenty dollar bill in your wallet to be worth something is a mutual agreement between you and those around you.

LC: Still, you can’t just wave a magic wand and conjure up new money. For a brand new currency to gain traction, it needs a use-case.

MCO: So, how did bitcoin overcome this hurdle?

LC: Nathaniel Popper is a New York Times reporter, and in his recent book, Digital Gold, he chronicles the journey of Bitcoin. He says that the first critical use-case for bitcoin was the Silk Road.

NATHANIEL POPPER: Before anybody's going to care about you, you have to be worth something, so I think Silk Road made Bitcoin worth something.

LC: If you’re not familiar with the story, the Silk Road was an encrypted website mostly used for buying and selling drugs. The FBI busted the site in 2013, but it’s estimated that over its two year run, tens of millions of dollars changed hands.

MCO: And on the Silk Road, Bitcoin was the currency of choice.

NP: Ross Ulbricht who created the Silk Road saw that Bitcoin could make this new kind of market possible, and it grew incredibly quickly, and it really was as it grew, that Bitcoin became worth something for the first time, that people realized "Oh this does something that I can't do with the existing financial system." And obviously, that's illegal transactions, but they were real transactions. People were sending $100-$200 to Amsterdam, and it got there every time. And that was really the first field test for Bitcoin that showed that it worked.

MCO: Bitcoin being used as a currency to buy and sell drugs didn’t exactly help confer legitimacy to the cryptocurrency. But as Popper notes, it showed that bitcoin worked as a payment system.

LC: And while the Silk Road was growing, computer scientists, curious entrepreneurs, and other non-drug dealer types were becoming increasingly interested in bitcoin technology.

NP: People realized "Okay, this may be useful for more than just these nefarious transactions. Maybe you can use this as a new kind of payment system,” and so you had pretty small number of entrepreneurs and business folks early on who saw that there was something here, and started talking it up to their friends.

LC: These entrepreneurs were scattered around the world, but eventually, bitcoin started generating interest in Silicon Valley.

MCO: And when it took root in the Valley, some people here found the technology intoxicating.

NP: I think part of the backdrop was the general confidence and exuberance in Silicon Valley about how disruptive Silicon Valley could be. This is a time where startups of all sorts are getting bid up wildly. And so coming in with yet another crazy idea, this Bitcoin idea that we can disrupt finance, it kind of played into that moment. And then the other thing for the Valley was this knowledge that finance and Wall Street was something that Silicon Valley really had never managed to touch, had never managed to disrupt.

MCO: Bitcoin fever, though, was put on hold in October 2013, when Ross Ulbricht was arrested and the Silk Road was busted by the FBI.

LC: The investigation into the Silk Road prompted members of the US Senate to hold committee hearings. They asked the FBI and the SEC to weigh in on the legality and legitimacy of Bitcoin.

MCO: And you would think, considering the association between bitcoin and the Silk Road, that the FBI would come down hard against bitcoin. But interestingly, the FBI told the Senate committee that virtual currencies offer, QUOTE, “legitimate financial services.”

LC: Officials inside government seemed to be warming to the blockchain technology. And in New York, there was one regulator in particular who decided to take a good look at Bitcoin.

NP: You have this guy Ben Lawsky, who had been appointed to be essentially the top financial regulator in New York, and he's a real politically minded young go-getter who wants to create some legacy for himself.

MCO: Ben Lawsky is now in the private sector, and he’s also currently a Visiting Scholar with the Stanford Cyber Initiative. Leslie and I spoke to Lawsky back in September, shortly after he’d stepped down from his role as a regulator.

BEN LAWSKY: I was, for the last 4 years, the financial regulator for the State of New York. I was in charge of a department called the Department of Financial Services. We regulated banks, insurance companies, mortgage companies, everything in between.

LC: While he was in office, Lawsky built a reputation as a tough-minded regulator. For some, his willingness to hold people on Wall Street accountable was refreshing.

MCO: Cryptocurrencies had been on his radar for a while, but the collapse of Mt. Gox in early 2014 catalyzed his office to move forward with regulations.

LC: Mount Gox was one of the largest exchanges, and when it collapsed, hundreds of thousands of bitcoins were lost. It’s estimated that over 400 million dollars worth of bitcoin went down the drain.

MCO: And all the people holding bitcoins with Mount Gox had no way to recoup their losses.

BL: I viewed it as this was our obligation when I was there as a regulator. Money transmission was happening. Customer funds were being entrusted to third parties. And when those things happen, our job was to do our job.

LC: Lawsky told us that as he was learning more about bitcoin, he came to appreciate that it held a lot of potential. He was impressed with the blockchain technology.

BL: I initially was quite skeptical when I learned about it in 2013. I think many people are. Over time as we started to realize as regulators that we might have an obligation to do some regulatory work around it because it was a form of money transmission, we studied it pretty hard for a good period of time and actually held hearings eventually. I found that the more I personally looked into it, the more interested in it I was and fascinated by its potential going forward.

MCO: Lawsky also said that he wanted to be careful about how he crafted the rules for governing cryptocurrencies.

BL: We tried to do it in a way that respected the innovation, we didn’t just want to slap on existing money transmission rules to new technologies. We wanted to be sensitive to new innovations and new developments.

LC: New York is the headquarters for many financial firms. So regulations there often serve as a guideline for other states and other governments.

MCO: New York’s Bitlicense law was first proposed in July 2014 and for some Bitcoin enthusiasts, the whole idea of regulation was a slap in the face, violating everything bitcoin represents.

LC: There were others, though, that said regulations were inevitable if Bitcoin was ever going to go mainstream.

MCO: The Bitlicense law went through several commenting periods, and was enacted in August 2015. Among other things, the law requires bitcoin start-ups to share details about their internal operations. Firms also have to ensure their customers are not engaged in money laundering or other illegal activities.

LC: Some companies argue that these requirements translate into prohibitive costs, and after the regulation went into effect, many bitcoin firms closed up shop in New York. Others decided to stick it out. The dust is still settling.

BL: The Bitlicense regulation, as it ultimately came out, it’s probably not perfect. Few regulations are. We knew we were doing something new and unprecedented and complicated. And I think you have to give it time. We’ll see how it plays out. . And look, one thing you haven’t asked is the blockchain and Bitcoin is all over the world. When we had our hearings, we had people from 117 countries, something like that watching the hearings online, the majority from Russia and China. This is an international phenomenon. It’s a fair question to ask why is New York State regulating it? Why are you the lead regulator for the world? The answer is we moved first. That doesn’t just mean that we’ll be an example for what everyone else should do whether at a national or an international level. It also means that they’ll learn from not only what we got right but from also what we got wrong.

LC: Even though many Bitcoin companies ceased operations in New York, according to Nathaniel Popper, the Bitlicense law actually confers a layer of legitimacy to the market.

NP: What's often been ignored in the Bitcoin community is that, while the bit license did bring in these rules that they didn't want to deal with, it basically allowed Bitcoin to continue on its way at a time when regulators might otherwise very easily have stepped in and shut it down altogether.

[MUSIC: “Sancho Panza Gets a Latte,” Kevin MacLeod]

LC: In some ways, it’s amazing that bitcoin is still around. On the other hand, maybe its persistence says something deeper about how trust is changing and shifting in the digital age.

MCO: Historically, we’ve trusted governments and banks to protect our system of finance. Here in the US, that trust has been shaken up. At the same time, we increasingly put our faith in technology to handle some of our biggest problems. The whole idea of bitcoin is built on that faith in technology and the Internet.

LC: The bitcoin roller-coaster has forced traditional banks and governments to ask deeper questions about how they do business. These traditional players are now devoting resources to integrate and capitalize on the blockchain technology.

MCO: One example is the company Ripple, which is trying to bring the blockchain inside modern banking systems. Susan Athey sits on the board of Ripple.

SA: We've now seen, "Here is a way, this is a way that is possible to move value instantly." Maybe we'll use that way. Maybe we'll use the Bitcoin blockchain. Maybe we'll use somebody else's technology, like Ripple, where I'm on the board, has an alternative technology and alternative protocols for communicating and moving value between financial institutions. Maybe we'll use something else. Maybe consortiums of banks will develop their own technology for particular applications. But now that we know it can be done, the question isn't if. It's when. And if it's going to be soon, then everyone wants to become part of that movement. They want to control the change. They don't want to be left behind. It's galvanized a really sea change in thinking for financial institutions.

MCO: Bitcoin has already made its mark, but there are still a lot of questions. Will bitcoin the currency continue to have value and be relevant? And can banks can take what they like about the blockchain and use it to improve their current systems?

LC: Whatever happens, a lot of people are talking a big game when it comes to the blockchain. In fact, some go so far as say that it’ll be as revolutionary as the Internet itself.

SA: It's like the internet of value as an analogy to the internet of information that we have today. What if we could move bits of value the way that we move bits of information today? In the early 90s, we didn't really know what we were going to do with all of this. The idea that people would want to send 140-character tweets, that would have been crazy. All the ways that people used video and the iPhone, I mean, we wouldn't have thought of all of these things. But they were enabled by the internet of information. But the internet of value hasn't really caught up.

LC: The blockchain could change everything. After all, we’re talking about disrupting our current system of money, finance, and anything else in our society that relies on a system of trust.

MCO: Maybe we can create new ways to verify contracts, transfer property titles, execute wills, vote in democratic elections, or do anything at all that requires a trusted third party. It’s still early days, but there may be ways to build on the blockchain that we can’t even conceive of right now.

LC: When you step back and look at it, the emergence of Bitcoin is symbolic of the larger forces of big data and technological disruption.

NP: When it comes to the financial system, and technology, it tells this story about the rising importance of technology in recent years. And I think it also then gets at this clash that I think is going to become more important between the tech world and the finance world, and because the finance world was really a center of power and political influence, and I think tech is viewing this as its moment to become the next center of power in this country.

MCO: As we’ve been exploring on this podcast, big data and cyber technologies have the capacity to radically change the balance of power across society.

LC: People say money makes the world go round. But if money really is all about trust and perception then there’s an open question: what systems and institutions are we most comfortable trusting in the digital age?

[MUSIC: “From the Outset,” Nick Carlozzi]

LC: Raw Data is produced by me, Leslie Chang, and Mike Osborne. Our theme song is by Nick Carlozzi. We’d like to thank Allison Berke for editing help this week.

MCO: If you want to learn more about bitcoin, we recommend Nathaniel Popper’s book, Digital Gold.

LC: Raw Data is a production of Worldview Stanford, and you can find us on the web at worldview DOT Stanford DOT edu. We’re on Twitter at raw-data-podcast.